It's a Mahakumbh of a different kind on Dalal Street with foreign portfolio investors washing their hands off Indian equities with outflows nearing $10 billion in 30 sessions since the year began. At ₹88,139 crore ($10.16 billion) as of February 11, net sales for the year surpassed 2008 outflows of ₹52,987 crore by a factor of 1.66 times. Despite the massive fire-sale, the benchmark Nifty index is down just 2.83% at 23,071.

While these statistics may evoke a sense of jingoism about the resilience of domestic institutional and retail investors, the reality is more sobering. With FPIs continuing to offload equities, incremental SIP flows, averaging at nearly $3 billion (over ₹26,000 crore) a month, will primarily serve as a cushion to absorb the selling rather than propel indices higher. Adding to the challenge, retail inflows may increasingly be diverted toward upcoming IPOs, potentially exacerbating weakness in the broader market.

Factors contributing to the fall include the strengthening U.S. dollar, FPI outflows, and rising crude oil prices which had a debilitating effect on the rupee which has come off 2.6% since November even as the central bank has spent $77 billion from the forex reserves to prevent a sharp collapse in the currency. The weakness is expected to continue given the rather strong U.S. dollar index (at 107), which has been bolstered by robust U.S. jobs data and relatively higher interest rate expectations.

Further the hawkish Fed outlook on inflation, even as the central bank cut rates by 25 basis points, has tempered aggressive rate cut expectations for the year from 100 bps to 50 bps. As a result, the differential between the U.S. and Indian 10-year yields has come down to a new low. The current US 10-year yield is hovering at 4.54% vs India 10-year yield of 6.80%. Considering the rupee depreciation risk, and weak corporation earnings of Indian companies, FPIs are better off investing in their home markets.

In fact, while emerging market (EM) funds broadly have seen a stabilisation in outflows over the past two weeks, India remains an outlier, witnessing sustained selling pressure.

Foreign fund outflows from India totalled a staggering $570 million this week alone, pushing cumulative redemptions since October 2024 to $5.7 billion. The latest wave of selling is particularly driven by dedicated India-focused funds, marking their first sustained exodus since 2021. This trend contrasts with other major EM markets, where foreign fund outflows have either slowed down or turned positive. China, for instance, recorded a marginal inflow of $28 million this week, signalling a reversal of earlier selling pressure.

While the first phase of India’s capital flight from October to December 2024 was primarily linked to global emerging market funds reallocating capital towards the U.S., the current wave of selling is being led by India-dedicated funds. Since the start of 2025, nearly 70% of India’s total outflows have originated from these funds, amounting to $1.9 billion out of the total $2.8 billion in foreign redemptions year-to-date, according to Sunil Jain of Elara Capital.

The biggest redemption streak is stemming from U.S.-based funds, followed by institutions in Ireland, the UK, and Japan. The shift indicates a growing reluctance among foreign investors to maintain India-heavy portfolios, possibly reflecting concerns over valuations, political uncertainty, and global macroeconomic factors.

The sustained selling by dedicated funds could have broader implications for India’s equity markets, particularly in sectors that have historically relied on steady foreign inflows. If the trend persists, it may lead to heightened volatility and potential rebalancing by domestic institutional investors to absorb the sell-off.

This only indicates that the worst is far from over for investors in the New Year.